If you’re only investing in Australian shares, this is your call to reconsider. Australian companies can deliver good returns, but the US is home to the giants like Microsoft Corp (NASDAQ: MSFT) and Apple Inc (NASDAQ: AAPL).
Having some exposure to US shares is not only an opportunity to add some growth to your portfolio, it’s also smart diversification. Just like spreading risk by investing in multiple companies, you should also consider spreading risk across countries.
If this is all a bit new to you, here’s how I’d do it.
US ETFs
Rather than trying to invest directly in US companies, you might be better off choosing an exchanged traded fund (ETF for short). An ETF is like a basket of companies that you can purchase in one transaction, and they can be bought and sold on the ASX just like Commonwealth Bank of Australia (ASX: CBA) or BHP Group Ltd (ASX: BHP) shares.
The benefit of an ETF is that you get instant diversification into hundreds or even thousands of companies in a single purchase. Instead of trying to pick the winners and avoid the losers, you effectively get the average return.
IVV or VTS?
The iShares S&P 500 ETF (ASX: IVV) and the Vanguard U.S. Total Market Shares Index ETF (ASX: VTS) are the two biggest US ETFs listed in Australia and are popular choices.
When you look at the numbers, it’s easy to see why!
Both have billions in funds under management and long track records (meaning they’re unlikely to stop trading any time soon). Both have very low management fees – at the time of writing IVV is 0.04% per year and VTS is 0.03%.
And both have very similar long-term performance, delivering ~16% per year over the last 10 years.
The difference between the two is that IVV only invests in the 500 largest US companies, while Vanguard, as the name suggests, invests across the whole market – over 3,600 companies!
This might sound like a key difference but I honestly don’t think it changes much. The S&P 500 accounts for over 80% of the total US market cap, meaning those 500 companies are 80% of the total value of all US listed companies.
Whether you’re invested in IVV or VTS, it’s these 500 companies doing the heavy lifting. If you look at the comparative performance between the two ETFs over time you can see that the VTS approach of investing more broadly hasn’t really made a difference to returns.
However, there is one other key difference…
Think about tax time
I know nobody likes to think about tax time but if you’re choosing between these two ETFs, it couldn’t be more important.
The key difference between these two ETFs is that IVV is domiciled in Australia while VTS is domiciled in the US. In plain language, a US-domiciled ETF means the company holding the shares on your behalf is a US company operating under US tax laws.
What this means for you is that if you invest in a US-domiciled ETF like VTS, even if its listed on the ASX, you’ll find yourself having to complete a US tax return to avoid double taxation.
For some, that may not be a big deal. Maybe you already have US income or assets, or you just love tax returns. But for most people trying to passively invest for the long-term, it’s a hassle that’s not really necessary. That’s why I’d lean towards IVV, but as always it’s best to speak to a professional to understand your particular circumstances and options.
